So you’ve sought intellectual property protection for your patentable invention or trademarked your logo. However, this alone may not be enough. For technology start-ups, they may understand the importance of protecting their intellectual property, such as trademarks and patents yet many times these same entrepreneurs create start-ups without understanding what is involved in terms of protecting their business through other avenues such as contractual mediums which can be more important than the registration of a trademark or patent. Specifically, it is important for startups to create a proper legal structure so that the company may protect its core business assets and the interests of its stakeholders such as its shareholders.
Incorporation
Incorporating a company prior to operating the start-up is the simplest way to protect against personal liability. Generally, creditors of a company will not be able to hold the shareholders responsible for any liabilities incurred by the company, and the personal assets of the shareholders will be out of the reach of the creditors. Thus, while it may be tempting to delay the incorporation process until it is relatively certain that the business will be a success, the savings incurred from the delay of incorporation does not outweigh the potential liability issues that could arise and negatively affect the unincorporated start-up.
Another benefit to incorporating the startup is that it is also easier to attract investors if a corporation is formed to carry on business. Investors will be more willing to invest money into a corporation rather than individuals, so that they can receive shares in the company in return for investing. There are various ways to devise the share structures to meet each start-up’s specific needs.
The corporation is also taxed at a more beneficial rate and give the entrepreneurs involved additional methods of structuring their income and their tax liability. Finally, a corporation provides the entrepreneur with instant recognition and begins the process of building goodwill. Goodwill is an intangible asset, which encompasses the reputation and branding of both the business and the products it represents.
Shareholder Issues
If there is more than one individual or investor involved in creating the start-up company, it is highly prudent for the parties to enter into a shareholders’ agreement. A shareholders’ agreement outlines the rights, duties, and obligations of each of the shareholder, as well as govern the methods and procedures by which a shareholder can exit from the start-up. One of the key benefits of having a shareholders’ agreement in place is to minimize the potential for litigation. In the event that there is a dispute by the shareholders involving the operation of the corporation, or how equity should be split, the shareholders’ agreement will govern. Having established rules at the outset of the start-up’s existence will lead to a faster resolution of any potential disputes and in a more amicable fashion.
IP Protection
Once the corporate foundation is in place, start-ups should perform an audit to ensure that all of its intellectual property is protected and not just the underlying core patent or trademark. The exact ownership of the intellectual property should also be revisited as the initial patent or trademark may be in a personal name as opposed to the name of corporate owner. For additional information on the different types of intellectual property protection available, please visit http://www.ecommercetimes.com/story/68175.html.
Agreements for the Website
Particularly if the start-up is a web-based company, there are various agreements that are important for the operation of the website. Firstly, all websites, especially those websites whereby customers and users are required to create password controlled accounts, or where products or services can be purchased, should have a thorough privacy policy, which outlines how personal information collected by the website will be treated. Most jurisdictions will have statutes regulating the collection, retention, and destruction of personal information. Thus, care must be taken to ensure that the privacy policy complies with the various requirements established under those statutes.
Another important agreement for web-based start-ups is a Terms of Use Agreement. A Terms of Use Agreement provides the terms and conditions by which users and customers can access the start-up’s website. A Terms of Use Agreement usually contains disclaimers from liability, which is particularly important if there are links to third party websites, products, or services, as a proper Terms of Use Agreement will ensure that a start-up does not incur any liability from the activities of such third parties.
Lastly, having an End User License Agreement in place may also be prudent for start-ups, especially if the products to be launched include software.
Other Agreements
There are various other agreements a start-up should keep in mind as it begins its operations. For example, if a start-up intends to distribute its products and services through third parties, distribution agreements or agency agreements can be executed to document that relationship. In addition, if a start-up plans on hiring help, it is important to enter into employment agreements or independent contractor agreements, depending on the nature of the relationship between the start-up and the help. Thought will have to be given as to whether the relationship is one that is between an employer and employee, or a company and an independent contractor, as there are legal implications which can arise depending on the status of that relationship.
Money Invested Now Will Lead to Savings Later
echnology-based start-ups must be mindful of the fact that the protection of their intellectual property is only one level of protection that they must undertake in order to protect their business. In the long run, having a proper legal foundation in place at the forefront will save the start-up from headaches and unnecessary costs. With the proper legal foundation in place, start-ups can simply focus on improving their products and services.
Cruickshanks, Cheryl V.
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Fernandes, Merlyn
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Hamilton, Robert J.
(416) 972-9001 Ext. 500
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Heydary, Javad
(416) 972-9001 Ext. 201
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Reinbergs, Eb
(647) 288-1181
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Yu, Daisy
(416) 642-2026
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